To be (fair) or not to be (fair) — that is the question

Rebecca Lynn White is a director in Western Reserve Partners' Industrial Group. She focuses on mergers and acquisitions, capital raising and bankruptcy and restructuring transactions.

Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” But just who determines that “fair” value? In private companies with one shareholder or one controlling shareholder, the owner ultimately determines what fair value is for the business. However, in public companies or businesses with a balanced group of shareholders, it is often difficult for each shareholder to be fully equipped to determine the fairness of an offer, much less agree on a specific value. Many of these shareholders may not even be active in the day-to-day operations and thus are unlikely to be aware of the elements of the business that influence valuation or the details of any discussions regarding a transaction. How can these shareholders then trust whether an offer for their business is ultimately fair, particularly when that offer is unsolicited? In such situations, either one or both of the following tactics should be taken:Conduct a go-shop process: When an offer comes unsolicited, it is often difficult for shareholders to determine how value specified relates to the true market value of the business. A go-shop process enables the company to spend a limited amount of time (typically 30 to 60 days) shopping itself to check the market for buyers that might be willing to pay a higher price than the offer currently on the table. If no superior offers are received for the business, the company’s board and shareholders can feel comfortable that the current offer is at least a market-clearing price.While buyers might not be fond of the target company extending the process in order to “shop their bid,” they typically go along with the process as it often facilitates the transaction and incents the board to accept the offer if no other competing bids are surfaced.One notable example is when Dell Inc. hired a financial adviser last year to conduct a go-shop process to seek superior offers to the go-private bid led by founder Michael Dell. The company received interest from two alternative groups during the process, but ultimately completed the deal with Mr. Dell, who was backed by Silver Lake Partners. It is important to note, however, that the price at which the deal closed was higher than Mr. Dell’s initial proposal, a direct result of the go-shop process.Issue a fairness opinion: A fairness opinion is a detailed valuation of a business that compares the derived value to that offered in the deal in order to determine whether the price and deal structure are fair from a financial point of view.A third-party investment banking firm that is not representing the buyer or seller typically is engaged to avoid conflict. The firm issuing the fairness opinion conducts a variety of analyses to independently assess the fair market value of the business. The fairness opinion does not address whether the offer on the table is in fact the best the market will bear, however. If that is the ultimate concern of the board and shareholders, then running a go-shop process or some other form of market check in conjunction with obtaining a fairness opinion would be the proper course of action. Some of the most recent local merger-and-acquisition headlines have surrounded the tender offer of the Richfield-based insurance company National Interstate Corp. (Nasdaq: NATL).The company received an offer from Great American Insurance Company, a wholly owned subsidiary of American Financial Group (Nasdaq: AFG), earlier this year, which was challenged by several of the company’s shareholders. An investment banking firm was hired to render a fairness opinion relative to the original tender offer of $28 per share. According to public documents and statements from one of the company’s shareholders, the investment banker “provided a draft opinion to the company on the evening of Feb. 15, 2014, to the effect that the original offer price was not fair, from a financial point of view, to the public shareholders of the company.” The offer by Great American was subsequently increased to $30 per share and was extended until March 17th. Public company boards typically employ one or both of these strategies to build comfort around the fairness of the value and minimize the risk for lawsuits post-transaction. Even privately held businesses with multiple shareholders will utilize these options to help settle disputes among the group. Ultimately, as evidenced in the National Interstate situation, it is up to the shareholders to determine what they deem to be fair. But it certainly helps to have a second opinion.

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